Buy To Let Mortgage Question

Smudger78

Hi,

We are looking into buying a small property to let out as a long term investment for the future. The question we are trying to find an answer for though is what impact will this have on our ability to borrow for a house move of our own in the future. Will the amount we borrow on a buy to let mortgage be taken from the amount we are allowed to borrow (based on earnings) for our own home in its entirety or do lenders take into account the fact that you are letting out the property so have income to cover that mortgage?

Would be good to hear from anyone with an answer to the above and experience of doing this who can avoid on other considerations and pitfalls etc..

Thanks

Thrugelmir

From your post it's unclear whether you currently own your home. Owning a residential property is a requirement for the majority of BTL lenders.

With regards to BTL as an investment. Do your homework as property letting is a business. So there are considerable risks not just rewards.

Smudger78

Thrugelmir wrote: »

From your post it's unclear whether you currently own your home. Owning a residential property is a requirement for the majority of BTL lenders.

With regards to BTL as an investment. Do your homework as property letting is a business. So there are considerable risks not just rewards.

Hi,

Apologies, probably didn't provide enough info did I? So anyway, yes we own our own home, have an outstanding mortgage of £111k and combined income of £65k. Having searched and read other threads on the subject it seems as though it may depend on the lender as to whether the BTL is taken into account in its entirety or not and this will also be influenced by you being able to provide evidence of receiving sufficient rental income to cover the BTL mortgage....

GMS

As long as the rent covers 125% of the mortgage based on interest only at 6% then most would ignore the mortgage for a residential application.

Calculations vary but use that one as a benchmark.

Loan to Value may well be restricted with many lenders for a second mortgage so if you have a BTL in place your future options for a residential could be restricted.

Smudger78

GMS wrote: »

As long as the rent covers 125% of the mortgage based on interest only at 6% then most would ignore the mortgage for a residential application.

Calculations vary but use that one as a benchmark.

Loan to Value may well be restricted with many lenders for a second mortgage so if you have a BTL in place your future options for a residential could be restricted.

Hi,

When you say "based on interest only at 6%" I understand that most people go for interest only BTL mortgages. I am a bit confused by this, if someone else is going to be paying it for you why wouldn't you go for a capital and interest mortgage so that you can build up equity in the property?

Thanks

Typhoon2000

Smudger78 wrote: »

Hi,

When you say "based on interest only at 6%" I understand that most people go for interest only BTL mortgages. I am a bit confused by this, if someone else is going to be paying it for you why wouldn't you go for a capital and interest mortgage so that you can build up equity in the property?

Thanks

You can can do either interest only or repayment, but lenders want you to show that your expects rental will cover the interest payments by 125%
People have different reasons for buying BTL. Most investors would go for income and sell the property to exit so would have no need to tie up their capital paying repayments on the mortgage.
You could always overpay an interest only mortgage if you want to build up equity. Gives much greater flexibility than repayment.

Thrugelmir

Smudger78 wrote: »

I am a bit confused by this, if someone else is going to be paying it for you why wouldn't you go for a capital and interest mortgage so that you can build up equity in the property?

Only the interest element of mortgage repayments is tax deductible. So the capital is actually repaid from after tax income, i.e. rent received less interest less expenses = taxable profit.

BTL was born out of an era of rapidly rising property prices and a supply of in essence cheap funding. Unless you've got capital to inject at the outset, repaying the mortgage will require a good gross yielding property to make the numbers work. Otherwise there's no alternative than to sell the property and repay the mortgage at the end of the mortgage term. This in itself may come at some significant cost , i.e. void rental period and costs of selling.

Smudger78

Thrugelmir wrote: »

Only the interest element of mortgage repayments is tax deductible. So the capital is actually repaid from after tax income, i.e. rent received less interest less expenses = taxable profit.

BTL was born out of an era of rapidly rising property prices and a supply of in essence cheap funding. Unless you've got capital to inject at the outset, repaying the mortgage will require a good gross yielding property to make the numbers work. Otherwise there's no alternative than to sell the property and repay the mortgage at the end of the mortgage term. This in itself may come at some significant cost , i.e. void rental period and costs of selling.

Thanks. I've found a property which I think would be a good starting place as its relatively cheap and in a good place for renting out (nr shops/train station). It looks like I could get an interest only mortgage for around £200/mth and achieve £400-£450/mth rental which sounds ok to me. There would be a bit of initial cosmetic refurb cost and obviously other ongoing costs (landlord insurance etc..) but these would be relatively low level and the yield would be 8-10% which I've read is quite good.

In terms of overpaying on an interest only mortgage as it seems most buy to letters do, how does it working when you have cleared all of the interest? If you keep paying do you start eating away at the capital? But then that would be just like a repayment mortgage wouldn't it?

kingstreet

You pay interest on the current balance.

If you make a payment to reduce the capital, the future interest payments fall.